UNCERTAINTY, LIQUIDITY, AND HOUSING CHOICES

This paper analyzes the housing choices of illiquid households facing uncertain future housing prices. It shows that illiquidity in the housing consumption-investment model of Henderson and Ioannides (The American Economic Review, 1983, 73, no. 1, 98-113) causes a conflict between the housing consumption and investment motives. Consequently, (1) a higher permanent income may not make housing investment and home owning more attractive, (2) the income path affects housing choices, and (3) greater expected housing price appreciation, or lesser uncertainty as to the future price of housing, does not necessarily encourage housing investment. These results indicate the importance of controlling for household liquidity in empirical housing studies.